Bankrupt Spouses and Divorce

Financial difficulties and the breakdown of a marriage often run together. It is very far from unknown for one of the spouses to be facing bankruptcy at the time of a divorce. So what would be the effect of a bankruptcy order on the financial settlement and division of the family assets?

On divorce everything owed by the spouses falls into one matrimonial pot. The assets of a bankrupt spouse do not belong to them but belong to the trustee in bankruptcy. This is going to have serious implications for the other party as they are likely to have no claim on these assets as against the bankrupt’s creditors. The matrimonial pot for division is going to be much smaller.

The main matrimonial assets is likely to be the family home which will probably be jointly owned. Particularly where there are young children it is likely that the spouse caring for them will apply for an order that the home be transferred to her in order to provide a roof over the heads of the children. The court is able to make a property adjustment order against the other spouse but cannot make one against that spouses trustee in bankruptcy. The half share in the property will be owned by the trustee and he has a duty to sell and realise that share for the benefit of creditors.

A bankrupt spouse will be unable to pay a lump sum or any maintenance for the children or spouse. He will have no assets to sell to realise money or anything which the court could order to be sold or transferred. The trustees will take any income for the payment of creditors and this will not be available for settlement on the other spouse.

So what can be done? The answer can only be to act quickly if there is the possibility of your spouse being declared bankrupt. Remember that some vindictive spouses will deliberately declare themselves bankrupt to frustrate matrimonial claims. If this seems possible or is threatened make an immediate application to the court so that financial orders can be made before the bankruptcy order. If an order is made there is the possibility of the trustee applying to have it set aside but in all probability this will be unlikely except where the debts are very substantial.

There have been cases where a spouse has deliberately filed for bankruptcy even though it is possible to show that he is not insolvent. Should this be the case it may be possible to apply to the court for the bankruptcy to be set aside. It may also be possible to show that notwithstanding the bankruptcy there are still funds available for the payment of maintenance.

Any pension owned by the bankrupt is an exception and does not pass to the trustee in bankruptcy. The court may therefore be able to minimise the effect of the bankruptcy by making a pensions sharing order transferring the benefit of the pension to compensate for other items.

Should a lump sum have been awarded in the divorce proceedings or where there are outstanding court costs or maintenance it will be possible to claim these in the bankruptcy. You will rank equally with other creditors but unlike them your spouse will not be released from liability for these amounts even when discharged from his bankruptcy.

Bankruptcy is now a ready option at times of financial difficulty and the affect is not as onerous as at one-time. Bankruptcy will have serious implications for a divorce settlement but with help from an experienced family lawyer it need not be a bar to a fair and proper settlement.